Escalating Middle East conflict jolts energy markets

In the February 2026 edition of the EEMM, we noted that the opening month of the year could offer an early indicator of the market environment ahead. Developments since late February quickly confirmed this view. After a period of easing prices, driven largely by forecasts of mild weather and by declining fuel and carbon prices, the US attack on Iran at the end of the month abruptly reversed market sentiment. Shipping through the Strait of Hormuz halted amid safety concerns, delivering the most significant bullish shock to energy markets since 2022. Markets are now pricing in not only lost supply but the very limited flexibility available to reroute and replace disrupted volumes.

Starting with fuel markets, the US attack on Iran on 28 February triggered an immediate escalation across the Gulf. Qatar shut down LNG production at one of the world’s largest export facilities as a precaution following Iranian drone strikes targeting the region. Iran also launched missile and drone attacks across the Gulf, hitting major energy infrastructure, such as a Saudi Aramco refinery. With Qatar and the UAE accounting for around 18 per cent of global LNG supply, of which roughly 80 per cent is directed to Asia, Asian Japan/Korea Marker (JKM) prices opened at their largest premium to the Dutch Title Transfer Facility (TTF) in years as buyers scrambled to replace disrupted cargoes. In parallel, Egypt was forced into the spot market after Israel halted pipeline gas deliveries following the shutdown of Mediterranean gas fields.

Short-term gas prices more than doubled compared with the previous Friday, while Brent rallied by around 10 USD per barrel, pushing gas towards gas-to-oil and gas-to-coal substitution levels. Markets were further supported by fears of prolonged supply disruptions in the Gulf, given the strategic importance of the Strait of Hormuz. Coal prices likewise extended their February rally amid Indonesian supply uncertainty and heightened geopolitical risk, together contributing to very high power prices across Europe. With gas surging, coal and lignite-fired generation has moved back into the money, and with Amsterdam-Rotterdam-Antwerp (ARA) stocks near the lower end of their historical range, short-term fuel switching could trigger coal demand for renewed physical restocking.

With coal and lignite-fired generation becoming competitive again, attention has also turned to the carbon market, as higher coal burn would typically increase demand for carbon allowances. EU Allowances (EUAs), however, declined by around 11 EUR/t over the past month. The trigger was not fundamentals, which remain tight for 2026 and likely 2027, but rather a perfect storm of policy noise that clouded the market’s bullish medium-term outlook. Several industry groups and high-ranking politicians publicly discussed possible adjustments to the EU Emissions Trading System as a policy response to growing concerns over industry competitiveness. In parallel, the Italian government passed legislation to reimburse EUA costs for domestic gas power plants and called for a temporary suspension of the EU ETS, although the measure is currently under review by the European Commission.

Overall, we continue to monitor the usual key market drivers, including weather patterns during this ‘shoulder’ season, macroeconomic developments, and investment activity. However, the market’s primary focus remains the situation in the Middle East. The longer the interruption of energy flows through the Strait of Hormuz persists, the higher prices will likely need to rise to trigger demand destruction among European and Asian power and industrial consumers and to ensure adequate refilling of European gas inventories during the summer injection season, which currently remain near multi-year lows. 

In parallel, we will closely follow policy developments, as the debate around reforming marginal pricing in the European electricity sector and the functioning of the EU ETS has clearly regained momentum in light of recent geopolitical tensions and price spikes.

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